Jane Nielsen
Chief Operating Officer and Chief Financial Officer at Ralph Lauren
Thank you, Patrice, and good morning everyone. We are encouraged by our strong early progress on our Next Great Chapter: Accelerate plan. We leveraged our multiple strategic drivers and superior operational capabilities to deliver third quarter results ahead of our expectations. We drove another quarter of solid topline growth, with Q3 revenues up 1% on a reported basis and 7% in constant currency above our outlook. All three regions delivered positive revenue growth on both a reported and constant currency basis as well as positive retail comp growth.
Operating margin was at the high end of our guidance with strong expense discipline more than offsetting lower-than-expected gross margin. Operating with discipline has been and will continue to be a cornerstone of our long-term strategic plan with productivity helping to fuel our investments in sustainable long-term growth. Exiting the quarter, we continue to leverage the strength of our balance sheet which has served us well through times of uncertainty. We believe our elevated brand, clear strategy and targeted investments combined with our culture of operating discipline and fortress foundation enablers put us in a position of strength to continue to drive long-term value creation.
Let me take you through our third quarter financial highlights. Total company revenues increased 7% in constant currency, above our low to mid-single-digit outlook, led by double-digit growth in Asia and Europe. Guidance in results included a timing shift with the week between Christmas and New Year's moving back into the third quarter from the fourth quarter last year due to the 53rd week in fiscal '22. This benefited this year's Q3 sales by about 130 basis points, which should negatively impact our smaller fourth quarter by an estimated 170 basis points. Ralph Lauren digital ecosystem sales grew high single digits in constant currency and more than 40% on a two-year stack. With our owned Ralph Lauren digital sites, sales grew 10% on top of more than 30% growth last year. We continue to elevate and expand the breadth of our offering online while enhancing the user experience with a rich digital content.
We are also driving further improvements in quality of sales with an increase in full price sales penetration and digital margins strongly accretive to our overall profitability in the quarter. Note that the fiscal quarter shift benefited our own digital sales by about 2 points in Q3 and should negatively impact Q4 by about 3 points. We continue to deliver gross margin expansion in constant currency this quarter consistent with our long-term guidance. Total company adjusted gross margin was 65.2%, down 80 basis points to last year on a reported basis, but up 80 basis points in constant currency. The increase was driven by product mix elevation with AUR up 10% on top of 19% growth last year and lower air freight reliance following last year's supply chain disruptions.
While we continue to drive our long-term brand elevation strategy, gross margins were below our expectations this holiday driven by, first, targeted outlet promotions in North America to drive conversion with our value-oriented consumers; second, stronger-than-expected post-Christmas sale days which shifted into the third quarter from Q4 last year; and finally, higher duty costs in Europe. Compared to fiscal '20 pre-pandemic levels, adjusted gross margin was still 300 basis points higher in the third quarter. Our better-than-expected revenues and operating expense discipline in the third quarter also enabled us to deliver operating margins at the top of our guidance range. Adjusted operating margin was 16% on a reported basis and 17.8% in constant currency, representing 190 basis point constant currency increase to last year. Adjusted operating expenses declined 1%, including a marketing expense decline of 8% over last year's disproportionately back half-weighted spend. Marketing was 7.3% of sales compared to 8.1% in the prior year period. As Patrice mentioned, operational excellence remains a key element of our fortress Foundation, and we remain sharply focused on operating expense discipline even as we continue to invest behind our brands and targeted global expansion to drive long-term sustainable growth.
Moving to segment performance, starting with North America. Third quarter revenues grew 1% as stronger direct-to-consume performance more than offset a slight decline in wholesale, as anticipated. The shift of post-Christmas days benefited our performance by about 190 basis points in the quarter. This shift should negatively impact our fourth quarter sales by about 270 basis points. In addition, the absence of last year's 53rd week is expected to negatively impact North America by another 460 basis points in Q4. In North America Retail, third quarter comps grew 2% on top of a strong 38% COVID reopening compare last year. While we were encouraged by another quarter of positive comp growth in our full-price stores, this was offset by softer performance in our outlets as anticipated in our guidance.
Our outlet AUR was up high single digits, reflecting our ongoing brand and product elevation in the channel. However, we continued to see softness in our value-oriented consumers. We are focused on driving a strong value proposition to the consumer, which includes expanded category assortments, enhanced selling environments and targeted communications. Our fiscal '23 outlook still assumes caution in this channel through the rest of the year. Comps in our owned ralphlauren.com site increased 9% and more than 40% on a two-year stack, driven by strong performance in core product, tailored styles and footwear. Digital AUR increased on continued product mix elevation.
In North America Wholesale, revenues declined 2% to last year. As we discussed in November, the decline was entirely driven by a customs delay, which resulted in missed Q3 shipment windows, representing about three points of negative impact. As expected, we also saw a slowdown in replenishment trends as our partners focus on keeping inventories clean heading into the new year. Outside of this, our positioning in the wholesale channel remains competitively strong. We gained market share across men's, women's and kids in key partners, and our AUR and wholesale grew 10% on continued product elevation. Promotions on our brands at wholesale were largely aligned with our expectations going into the season. Inventories at wholesale are now normalized following last year's supply chain disruption, and we have experienced minimal cancellations to-date for spring '23. We still expect wholesale to be up in the fourth quarter of fiscal '23, despite our more cautious view on replenishment and our spring '23 inventory buys.
Moving on to Europe. Third quarter revenue increased 1% on a reported basis and 13% in constant currency. This 13% growth included about 450 basis points of benefit from the post-Christmas timing shift as well as a wholesale allowance benefit recognized in the quarter. We estimate the timing shift will negatively impact the smaller fourth quarter by about 120 basis points in Europe. Q3 European retail comps increased 11% on top of the 55% compare last year. Brick-and-mortar comps also up 11%, benefited from lapping the start of last year's Omicron variant as well as the post-Christmas sales shift into Q3. AUR increased 12% with gains in both brick-and-mortar and digital AUR.
Total digital ecosystem grew mid-single digits in the quarter, with low double-digit growth in owned digital commerce and wholesale.com more than offsetting softer pure-play results as anticipated. Europe wholesale declined 1% on a reported basis, but grew 11% in constant currency. This was ahead of our expectations, driven by roughly 8 points benefit related to lower-than-anticipated wholesale allowances as well as stronger spring '23 shipments and fill rates, more than offsetting softer reorder trends. Note that our wholesale outlook continues to embed a notable deceleration through Q4 based on challenging compares and macro headwinds. Overall, while our Europe business has performed better than expected through the first three quarters of the year, we remain cautious on the remainder of fiscal '23 into fiscal '24, given dynamic macro conditions across the region.
Turning to Asia. Revenue increased 1% on a reported basis and 16% in constant currency, a strong result given significant COVID outbreaks in the Chinese mainland as well as higher infection rates in Japan. Asia retail comps were up 8% with balanced growth across digital commerce and brick-and-mortar stores. By market, third quarter sales in Japan and Korea each increased mid-teens in constant currency. Australia, New Zealand and Southeast Asia were up more than 25% and 50%, respectively. The Chinese mainland was up 7%, despite the significant COVID impacts Patrice mentioned, while Hong Kong, Macau and Taiwan grew low teens in the quarter. We returned to full operations in the Mainland by mid-January. And while our teams are prepared to manage through further disruptions, we are encouraged by the continued resilience and strength of our consumer and brand momentum in China along with the rest of Asia.
Moving on to the balance sheet. Our balance sheet continues to be an important element of our Fortress Foundation, enabling us to balance strategic investments in our brand and business with returning cash to shareholders even through dynamic times. Through the third quarter, we returned approximately $560 million in the form of our dividend and share repurchases year-to-date. We ended the period with $1.7 billion in cash and short-term investments and $1.1 billion in total debt. Net inventory increased 33%, moderating from first half trends as we reduced goods in transit and significantly improved our lead times from last year's global supply chain delays. Inventory growth still reflects earlier timing of receipts, higher product costs and our strategy of product mix elevation. Nevertheless, we still expect to end fiscal '23 with inventory more closely aligned to sales growth. We continue to manage our inventory position smartly with the majority still weighted [Indecipherable] product. This gives us greater flexibility to adjust future production levels and allocate product to the channels and geographies with the strongest demand. We also continue to make meaningful improvements in transit times as we move through this year.
Looking ahead, our outlook is based on the evolving macro environment, including inflationary pressures, disruptions in the global supply chain, COVID-19, foreign currency volatility and the war in the Ukraine. We continue to plan across a range of scenarios, and our guidance represents our best assessment of market conditions and resulting consumer impact. For fiscal '23, we are maintaining our full year outlook in constant currency with revenues expected to increase high single digits or about 8% on a 52-week comparable basis. Our outlook continues to assume a challenging consumer backdrop in Europe and North America. We now expect foreign currency to negatively impact revenues by approximately 600 basis points. We expect operating margin of approximately 13.5% to 14% in constant currency compared to our prior outlook of about 14%. This is based on a more modest level of gross margin expansion in the second half of the year as we keep inventories current and align to demand.
Foreign currency is now expected to negatively impact operating margin by about 180 basis points. This compares to operating margin of 13.1% on a 52-week basis and 13.4% on a 53-week basis last year, both on a reported basis. Gross margin is now expected to be flattish to last year on a constant currency basis. We plan to continue driving stronger AUR and favorable product mix to offset increased product costs. Foreign currency is now expected to negatively impact gross margins by about 150 basis points in fiscal '23. For the fourth quarter, on a 13-week comparable basis, we expect constant currency revenue growth of about mid to high single digits. On a reported basis, which includes the impact of last year's 53rd week, we expect revenues to be up 1% to 2% in constant currency. Foreign currency is expected to negatively impact revenue growth by approximately 500 basis points.
Our outlook also includes about 170 basis points of negative impact from the week after Christmas shifting into fiscal Q3 from Q4 last year. We expect fourth quarter operating margin of about 5.5% in constant currency. This represents a roughly 190 basis point increase to last year, driven primarily by operating expense leverage as we normalize our cadence of marketing spend versus last year. Foreign currency is expected to negatively impact operating margin by about 160 basis points in the quarter. We expect constant currency gross margins to be about flat in Q4. This implies roughly 50 basis points of expansion on a 13-week comparable basis. Foreign currency is expected to negatively impact gross margin in the quarter by about 140 basis points. We now expect our tax rate in the range of 24% to 25% for the full year and estimate a roughly 29% tax rate for the fourth quarter. Though this could vary widely as Q4 is our smallest quarter and highly dependent on mix and discrete items. And lastly, we now expect capital expenditures in the range of $240 million to $250 million based on the timing of build-out.
In closing, our teams around the world are operating with agility and executing strongly, driving continued progress on our Next Great Chapter: Accelerate plan. This is a testament to the power of our iconic brand that Ralph created over 50 years ago, and the strength of our Fortress Foundation coupled with diversified engines of growth across product categories, geographies and channels. And with that, let's open up the call for your questions.
